New paper in the IMF Economic Review
Our paper Channels of Risk Sharing in the Eurozone: What Can Banking and Capital Market Union Achieve? (with Egor Maslov, Iryna Stewen and Bent E. Sorensen) is now forthcoming in the IMF Economic Review.
In the paper, we argue that the interplay of equity market and banking integration is of first-order importance for risk sharing in the EMU. While EMU created an integrated interbank market, “direct” banking integration (in terms of direct cross-border bank-to-real sector flows or cross-border banking-consolidation) and equity market integration remained limited. We find that direct banking integration is associated with more risk sharing, while interbank integration is not. Further, interbank integration proved to be highly procyclical, which contributed to the freeze in risk sharing after 2008. Based on this evidence, and a stylized DSGE model, we discuss implications for banking union. Our results show that real banking integration and capital market union are complements and robust risk sharing in the EMU requires both.
Mathias Hoffmann is Professor at the Department of Economics at the University of Zurich. His research focuses on the macroeconomic aspects of international financial integration and on the link between financial markets and the macro-economy more generally. His recent published articles include papers on the determinants of international capital flows and imbalances, the international transmission of business cycles, on international risk sharing, banking regulation, and housing markets. Prior to arriving in Zurich, he was Professor at the University of Dortmund in Germany and a Lecturer at Southampton University (UK). He holds a PhD in Economics from the European University Institute in Florence and obtained his undergraduate education in economics and mathematics at WHU School of Management, Brandeis University and the University of Bonn.
Mathias Hoffmann is affiliated with the University of Zurich’s research priority program in financial regulation (URPPP FinREG), a fellow of CESifo Munich and of the Centre for Applied Macroeconomic Analysis (CAMA) at the Australian National University, and has held visiting positions at the University of California at Berkeley, the Deutsche Bundesbank, the Bank of Finland, the Hong Kong Monetary Authority, the Bank for International Settlements, Norges Bank, Keio University and Stanford University.